Not long ago in Innovators' Insight, we argued that mega-mergers in the telecom industry were likely to prove disappointing. Here, we examine how our analysis has held up. Merger fever continues to course through the global economy as companies with ample cash use acquisitions to satiate the growth desires of hungry investors. Even Cisco Systems, a company famous for focusing on small acquisitions, has expanded its merger efforts. In 2005, Cisco purchased video network equipment provider Scientific-Atlanta for $6.9 billion. This year, it purchased Web conferencing provider WebEx for $3.2 billion.
One of the mergers described in last year's Insight proves a cautionary tale for future mega-mergers. In April 2006, French communications equipment provider Alcatel announced plans to merge with Lucent creating Alcatel-Lucent, a giant with annual revenues of more than $25 billion and close to 90,000 employees.
At the time, Patricia Russo, the CEO of the combined Alcatel-Lucent, said: "This presents extraordinary opportunities for our combined company to accelerate its growth. The combination creates a new industry competitor with the most comprehensive portfolio that will be poised to deliver significant benefits to customers, shareowners and employees."
Over the last year, Alcatel-Lucent's stock price has sagged; it has had to deal with an employee march in Paris protesting job cuts; and in February it reported an $800 million fourth-quarter loss. This is probably not what Russo had in mind. Boston Scientific's well-publicized struggles to swallow Guidant are another cautionary example of how mega-mergers can be a huge distraction.